What "Greed and Fear" has to say about NZ banks

The strategist credited with picking the sub-prime Credit Crunch, Christopher Wood, has warned in a research note that depositers in New Zealand banks could become worried about their health because of their exposures to the slumping property market and their heavy reliance on international wholesale markets for funding. He has recommended depositers should put their money with the government-owned Kiwibank. The chief strategist for Hong Kong-based broker CLSA Asia Pacific issues a regular report titled Greed and Fear. He was credited by the Wall St Journal as being the first to pick the Credit Crunch when he warned in October 2005 that investors should dump any securities linked to American mortgages. Wood wrote of the risk that collapses in the finance company and mortgage trust sector could spread into the banking sector. "The New Zealand situation is deteriorating at a pace that could precipitate depositor concerns about the health of the New Zealand banks," Wood said in its August 7 edition of Greed and Fear. On this point, there are a few key points to understand," he said. "First, the loan-deposit ratio of the New Zealand banking system is 175%, resulting in massive dependence on wholesale funding. Second, there is no deposit insurance system in place in New Zealand. Third, most of the major New Zealand banks are wholly-owned subsidiaries of Australian banks."

Wood said this meant a financial crisis in New Zealand would directly ricochet into Australia. "This New Zealand exposure is one important reason why reed & fear continues to recommend a zero weighting in Australian banks," Wood said. CLSA's head of regional banks research Daniel Tabbush had already highlighted that ANZ has 25% of its lending in New Zealand and other major Australian banks around 15%, he said. "Certainly, a depositor panic in New Zealand will present these Australian banks with a major problem," Wood said. "It is certainly the case that if the New Zealand government decides, Northern Rock style, to guarantee all deposits, it will certainly want ownership of its banking sector back," he said. "Note that the only non-Australian owned major bank in New Zealand is the government-owned Kiwibank, an institution which Greed & Fear now recommends all depositors with New Zealand dollars to transfer their savings to immediately." Wood went on to warn that the problems in New Zealand were a lead indicator of what might happen in Australia. "For like New Zealand, there has been a consumer debt driven bubble of massive excesses in Australia further fuelled by the following wind from the commodity boom," he said. "Thus, Australia still has a current account deficit of 7% of GDP despite the massively positive terms of trade shock stemming from the commodity boom. The problem now is that the domestic economy is unwinding just as the oil-led commodity complex is showing growing evidence of cracking," he said. "Like their New Zealand subsidiaries, the Australian banks also have a high loan-deposit ratio of 135%. This again translates into what is likely to prove an increasingly costly, and therefore reckless, dependence on wholesale funding. "As has been noted by Daniel Tabbush, the issue for banks in both New Zealand and Australia is that the rapidly weakening economies means that they will be forced to lower lending rates as both the Australia and New Zealand central banks start cutting rates aggressively in coming months. "But the problem will be that deposit rates will not come down nearly as quickly. One reason why is that the Australian and New Zealand currency bubbles have finally begun to bust. The New Zealand central bank has already cut once but a lot more rate cuts are coming since short term rates are still 8%. As for Australia, the central bank faces a problem of a two tier economy, in the sense of the strong commodity driven economy in the West and the weakening housing market in the East of the country. Wood, a former journalist for The Economist, saw an opportunity for macro investors to bet aggressively on falling interest rates and falling currencies for Australia and New Zealand. "But both trends will not be bullish for Australian banks which absolute-return investors should remain short of as for relative-return investors in Asia Pacific, the increasing likelihood of significant Australian dollar weakness over the next 12 months or more is another reason to run a massive underweight in Australia," he said. "This should be funded by an overweight in Japanese domestic stocks given the massive potential for yen appreciation against both the Australian dollar and the New Zealand dollar." Wood said another likely result of the coming financial crisis in Australia and New Zealand was the withdrawal of Japanese investors from Uridashi bonds. "The Japanese enthusiasm for the high yield on offer "Down Under" and the willingness to ignore the obvious currency risks have been well documented," he said. "Still a new report by CLSA's Head of Japan Research Jolyon Montague highlights the extent of this exposure. Thus, to quote one example, the Japanese investment trust industry has invested Y2.9 trillion in Australian bonds and another Y511bn in New Zealand bonds as at the end of June 2008, accounting for 16.7% of its total foreign bond holdings." "This same report notes that the flows into Aussie and Kiwi dollar instruments from the Japanese have already begun to slow. But there has as yet been no panicky withdrawal of funds. But that stampede for the exit will inevitably come if events turn out as Greed and Fear expects." Wood said the financial excesses of the credit bubble were not just confined to America. "This is a global phenomenon where the greatest excesses have been where the Anglo-Saxon free market model has been most vigorously practised. As noted here before by Greed and Fear, this is not an indictment of the free market model per se. But the model has been fatally compromised by the only too evident view of the relevant financial service sectors that the relevant governments and central banks will always bail them out of a problem," Wood said. "While this story is becoming increasingly understood in the financial markets, it is also going to become common knowledge on Main Street during the next 12 months. In the meantime, returning to the Australasian theme, while the initial vulnerability lies, as with Northern Rock, in terms of excessive dependence on wholesale funding, the long-term problem will be rising NPLs," he said. "These have barely begun rising. The NPL ratio for Australian banks is now only 0.4%, compared with a peak of 9.1% in 1992. Likewise, New Zealand banks' impaired assets to lending ratio have declined from 9.2% in 1991 to 0.1%." My view (for what it's worth).Christopher Wood paints an even gloomier picture than I do (and that's saying something) about the potential for contagion to spread from finance companies to banks. However, I don't think he's right that our banks are precarious or in any way vulnerable to a run. Our banks are very well capitalised. They are diversified across small business, medium business and corporates for lending, albeit with a bigger than usual exposure to home mortgages. However, they are heavily exposed to international markets for wholesale funding. But the banks are telling me they have no problem getting this funding at the moment. It simply costs more. One factor Wood may have missed from Hong Kong is that the Finance Companies and Mortgage Trusts that have collapsed were virtually unregulated. They were not forced to keep capital aside and they were involved in very risky lending at the fringe to Bentley-driving property developers. Most were also completely exposed to capitalising loans to developers and investors that required highly liquid real estate markets with rising prices to survive. Our banks are heavily regulated by the Reserve Bank, which forced them months ago to keep aside extra capital in case house prices fell 30%. The banks here also raised over NZ$2 billion through perpetual bond issues and other pseudo equity in March, April and May. I do, however, agree that the lack of a deposit insurance scheme is an issue that should be addressed to add another protection against a run on a bank. If I had to rank the banks in the same way as I did for the finance companies, our 4 banks would get all the ticks in our 5 Survivability Factors. They are diversified in their lending and their borrowing (certainly much, much more than for finance companies. They have AA credit ratings. They have very strong corporate backers in that they are owned by Australian pension funds with A$1 trillion in savings. At the last resort, neither the New Zealand nor the Australian government (and Reserve Banks) would allow any one of these banks to fail. If any one of them got into trouble, a merger would be forced or some bailout organised. At the very last resort the government would bail out any struggling bank and nationalise it. Your money is much safer in the bank in New Zealand than in any finance company and it is safer than in any bank in Britain or America, where there are genuine concerns about exposures to reckless securitised mortgage lending in America. Our banks hold their mortgages on their own balance sheets and control their own lending processes and standards.

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27 Comments

Is KiwiBank realy owned by the NZ Government? If you go to the website it has the following...

New Zealand Post Guarantee

New Zealand Post Limited, our parent company, has guaranteed our payment obligations, including any payment obligation in respect of any deposit made with us. The guarantee does not apply to payment obligations where the terms of the obligation expressly provide in writing that the obligation will not have the benefit of the guarantee. This means that the guarantee does not apply to unsecured, subordinated bonds issued by us. The guarantee is not secured and its amount is not limited. The guarantee is unconditional and is terminable by New Zealand Post Limited upon three months' notice to us. Any such termination does not affect any existing payment obligations owed under the guarantee at the termination date.

If NZ banks have increased risk then why shouldn't Depositors expect higher deposit rates this to me is a logical outcome. If you cannot get a higher interest rate then move your money to a safer destination.I have a vague idea that the only safe place maybe swiss govt bonds or German. After a while all this doom gets to you. I think investors have a right to expect their hard fought for earning should be safe both from a banking risk, a currency risk and especially an inflation risk. This i would have thought to be a priority not pampering to the people with excessive debt,and banks who have lent recklessly. A run on our currency and all the problems associated with, I don't need, does anyone.

Andrewj, undoubtedly many banks have lent recklessly in NZ (as elsewhere) but without a positive credit rating system in place how can NZ's banks sieve the wood from the chaff when it comes to loan applications? I see this as being very problematic in the near term as pigeons start coming home to roost. All that lenders can currently find out is if an individual has been declared bankrupt or had a summary judgment against them. This does not tell lenders if the applicant has lied on the form nor will tell them if they are already overexposed. Look at the latest Barfoots scandal "“ this only came to light because the falling property market stranded the so called 'victims'. These same victims were very happy to lie to the banks at the time of purchase and now are also very likely to default on loans they never expected to hold.
With a positive credit rating everything becomes so transparent lenders can tell what you had for breakfast. It was jaw dropping to see what info UK lenders have access to through credit rating agencies and its probably overdone (talk about a surveillance society). On the other hand NZ's credit reporting framework is so full of holes it could be mistaken for a Qantas plane. This might explain why suitcases full of money are disappearing at the rate they are. I'm not saying all kiwis are prone to lying but its rather obvious now that some don't seem to have a problem doing this, especially when the process makes it so easy. When you factor this in, on top of everything else, I don't think NZ's banks are very safe at all.

Sharon v
i agree but a little bit of deposit normally sorts the rot from the wood. I have seen workers get 110% loans and many with 95% and don't get me started on valuers. Some commonsense would have solved the problem. Min deposit 30% with 1 full time earner and any valuer caught out, not accepted by the bank anymore.The problem with the finance companies is the banks were lending to nearly anyone so the ones that couldn't borrow from the banks were very high risk and often needed, lets say favorable valuations.
It wasn't long ago that banks were wanting a share in the capital so as to profit from the capital gain, which they were creating with the easy loans. That is the level of intelligence in some of these banks. I have a friend in the UK who's son has borrowed 125% from northern rock but off course with rising values its was a 90% loan now a 150% loan.
I sat in london in sept last year while all my friends talked real estate and huge profits in march they were more subdued now they dont talk real estate anymore.Now I want to talk real estate they refuse to. Im indefinitely leaving no money in NZ Im going to lose enough on my house as it is. So many business have left has anyone tried to buy a business in NZ, all the banks wanted to know was the value of the land/ buildings they dont like lending on cash flow with out land as security.So thats why if you want to start a new business leave, not just because of the money but also red tape and costs.

Tks for this, Bernard. I'd wanted an expression of wholesale dependency and the 175 percenter does look overladen..

Must confess coming here for the read arose in a tip to "check out Wood". The above Chris looks okay, something one would not honestly declare for Jonathan. A hedge funder of two years' standing - sitting might be a better term - whose south-bound dough on BS, CFC and NRock recently hit -75 percent and funders stuck w/o redemption five years. Imagine..!

Then again, maybe Jonathan boy is the kind of 'positive' environment gambited by Tony W above..

Assuming there is an impending freeze up in funding, surely savers need a minimum of a deposit insurance scheme and likewise banks need a positive reporting system in place to determine low risk borrowers. Each part of the process must be able to determine its fair share of risk. If these things are not in place it is hard to see how any platform for trust can be re-established. Without these basic checks and balances any thaw in lending and subsequent economic recovery will be a long time coming.

Hate to answer your question with another question, but isn't it obvious from the comment. Clue, surname begins with W ends with d, four letters, two the same. Google it for one heap of data if you must though my synopsis is right on.. good luck in your search.. it sure pays not to hit op like this(oh yes, op = operational risk)

Regarding deposit insurance - when renewing my term deposits in June this year, I asked ASB whether they had a deposit insurance scheme. The employee on the other end of the phone had no idea and went and got their manager - who also had no idea. After a few calls were made higher up, it was discovered they hadn't. Apparently nobody has ever asked that question...

This is exactly like the finance company investors, everyday NZ savers have an attitude of impunity, investing wherever without even thinking of risk. Something can easily go wrong considering the immense complacency out there. I think we're all relying on our country's supposedly superior regulatory oversight. Let's hope it exists!

NZ being one of the few nations in the developed world to any longer have a National Bank(Kiwibank), will give us the most obvious advantage, should this bankers scam, where by the Central Banks have filled the world with more "Created Credit" than the world has the collective physical means to repay, should this scam actually destroy all confidence in the current means of global exchange, we will be in the very lucky position of having our own distribution system, via Kiwibank electronic transfer infrastructure, to spend our own money supply into circulation, backed by the future utilisation of our own ample resources, just as the Canadian National Bank was used to do in 1935, to bring Canada out of the Great Depression, The implementation of Social Credit in Canada between 1935-74, before they were lent on to join the IMF,
saw Canada achieve one of the highest living standards in the world, with the lowest national debt in the world, since joining the IMF in 1974 their national debt has gone from $18 Billion to $600 Billion, spending $36 Billion a year on interest payments, whilst the principal continues to rise, sound familiar, ask John Key, he can tell you exactly how it works. Now Social Credit, there's a good idea, it has worked before in the past, it can work again in the future, another good idea would be to introduce it before waiting for a crisis, wouldn't it? check out Canada's Greatest Experiment Canada's Great Experiment -Here
Cheers
Iain

Ian, I like the idea of being in control of our own money but how does Kiwiibank get out from the interbanlk transactions that happen each night ?
Aren't they already heavily linked into the system that is causing us so much greif ?

We "Create" our own money supply the very same way the privately owned Central Banking network "Creates" the worlds money supply now, but we bring it into circulation differently, instead of 97% of our money supply coming from off shore, then loaned into circulation at interest, meaning we pay three times true value for anything we do, we spend our own money supply into circulation, debt free, by way paying for labour and materials needed for the building and maintenance of our vital communal infrastructure, then as we use our own money supply, backed by the future utilisation of our own resources, we pay off our foreign debts as they become due, eventually erasing our current account deficit, just as they were well on there way to doing in Canada 1935-74, and just as NZ would have, if it had of continued with the very same Social Credit philosophy it used to build our state housing in 1938.
To have a look at the only political party in NZ wanting to join the growing worldwide push for Social Credit go Here or Here
Cheers
Iain

Hi Iain

can we slow down on the Social Credit party political broadcast ? :-) We don't want to get pinged by the EFA !!

I hear what you are saying Bryan.
I will lay off the links to the party website, I think everyone knows which way I very proudly and openly cut my gib,
In the case of other postings it is relavent to, I will be putting fourth the debate for return to the tried and tested humane economics of Social Credit as previously used successfully in both Canada and NZ, as opposed to the wealth transferring system of privilege that is the Debt Based Monetary System.
Keep up the great work, you provide a great service to democracy with this open interactive forum, most of the rest of the fourth estate could really learn something from you guys.
Cheers
Iain

The amasing thing to me is that we are witnessing the greattest meltdown of the credit system since the 1930's and nobvody onn the street understands what is happening. The aussie banks need to declare where they are at for mine it looks like Rabo at least you know who they lend to and on what criteria ie. agriculture production led business

No comments since September"­??? "¬did everyone panic and depart the planet!"­ "¬Hello..hello.. hello..."­ "¬recommend"­ ""¬matchbox"­ "¬20"­ "“ "¬lets see how far wev'e come"­" "¬to humour yourselves.
i've been searching the net for solutions and insight into the global meltdown."­ "¬The best thing i've found so far is looking at history and"­ "¬considering human nature."­ "¬At Wikipedia"­ "¬there's information on the Great depression which not only highlights the precurser to the event and its impact but also how countries recovered."­ "¬Some countries quicker than others."­
Humans inherently become self absorbed when things turn sour while all along the solution is being open minded and people centred. "­ "¬Nothing we experience in this life is in isolation and in the end we must trust other people (but maybe not people or banks you don't know)."­ "¬No matter how much oil we have in the lamp or don't have"­ ("¬ie money or petrol stockpiles"­) "¬we're all in this together.

Maybe putting other people to work in-order to provide a passive income (getting interest from banks who take money from borrowers to pay you) is the exact genius of our current world problem. Maybe the world solution is to borrow without interest in the short term and appreciate what we have, our jobs, family and the what we've earned from our own toils Or even better forgive some debt and start again, after all look at what the planet provides us maybe we should give something back?

My soloution...(and i have no qualifications what-so ever)"­ is to "¬stop chasing wealth in the theoretical human environment and carring burdens that we can't."­ "¬Everything we depend on comes from the natural world, food, other people, family, oxygen, even the very essence of our lives,. All"­ "¬free of charge or withholding tax"­ (you get no interest"¬ for holding your breath"­)"¬.

Money may provide independence and freedom but it also creates a false sense of security and if we have too much complete insecurity. All the time wealth can't exist independent of the natural world so resources are the things to protect.,( ie Living Things... People, Goats, sheeps, fruit and veg etc...they even reproduce themselves)
In the end i hope we humans can learn from this current Great Re Depression to invest back into the planet. After all the planet is the Ultimate Reserve Bank. Its the best place to make a safe deposit (No!! its not a hint!! i'm not suggesting burying money in the ground). In the end we 're born we live we die and no one can take Wall Street with them when they go. We have to give up everything anyway. lets live, conserve the planet and not go to war with the rest of humanity because of our insecurity or greed.

In October 2005 Mr Wood wisely declared: "Investors should sell all exposure to the American mortgage securities market." In an interview in 2007, he said: "Some institutions have been behaving like leveraged speculators rather than banks"¦ The UK economy is heading for a sharp shock. It just remains to be seen how bad."

Everyone has their favorite way of using the internet. Many of us search to find what we want, click in to a specific website, read what's available and click out. That's not necessarily a bad thing because it's efficient. We learn to tune out things we don't need and go straight for what's essential.

Influence can be defined as the power exerted over the minds and behavior of others. A power that can affect, persuade and cause changes to someone or something. In order to influence people, you first need to discover what is already influencing them. What makes them tick? What do they care about? We need some leverage to work with when we're trying to change how people think and behave.